
TL;DR
This paper introduces a deep hedging framework for Bermudan swaptions that overcomes traditional model limitations, improves residual P&L control, and incorporates a novel Option Spread Hedge strategy, with promising numerical results.
Contribution
It applies deep hedging to Bermudan swaptions, addressing practical market issues and introducing an innovative Option Spread Hedge for better robustness and interpretability.
Findings
Deep hedging improves residual P&L management.
The approach effectively handles early exercise features.
Numerical results validate the method's robustness.
Abstract
Abstract This paper proposes a novel approach to Bermudan swaption hedging by applying the deep hedging framework to address limitations of traditional arbitrage-free methods. Conventional methods assume ideal conditions, such as zero transaction costs, perfect liquidity, and continuous-time hedging, which often differ from real market environments. This discrepancy can lead to residual profit and loss (P&L), resulting in two primary issues. First, residual P&L may prevent achieving the initial model price, especially with improper parameter settings, potentially causing a negative P&L trend and significant financial impacts. Second, controlling the distribution of residual P&L to mitigate downside risk is challenging, as hedged positions may become curve gamma-short, making them vulnerable to large interest rate movements. The deep hedging approach enables flexible selection of convex…
Peer Reviews
No public reviews on file for this paper yet. If you reviewed it on a platform where reviews are public (OpenReview, ICLR, NeurIPS, ICML), you can paste yours below so the community can read it here.
Videos
No videos yet. Explain this paper in a talk, walkthrough, or lecture? Add one.
Taxonomy
TopicsGlobal Financial Crisis and Policies
